Stocks and shares ISA explained

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If you’re looking for a savings or investment account that will give you good returns over the long term, you may have come across stocks and shares ISAs. But what are they, how does a stocks and shares ISA work, and what kind of returns might you actually get? We explain everything you need to know about stocks and shares ISAs, as well as some alternative savings options you might want to consider.

The rundown
  • Definition: A stocks and shares ISA – also known as an investment ISA in the UK – is a tax-free investment account that allows you to invest your money in funds, bonds, and shares
  • Tax-free gains: You won’t pay income tax, dividend tax, or capital gains tax on any money you earn from a stocks and shares ISA
  • Risk: While it’s possible to earn a good average return on a stocks and shares ISA, there are no guarantees; the value of your investment could fall, and you may lose money

What is a stocks and shares ISA?

Stocks and shares ISAs, also called investment ISAs, are a type of investment account, as opposed to a traditional savings account. They are tax-efficient individual savings accounts that allow you to invest without paying tax on the money you earn from income, capital gains, or dividends.

Having a stocks and shares ISA means you’ll be investing in companies, government and corporate bonds and investment funds, rather than putting your money away into a savings account that provides risk-free returns (as long as your deposit is protected by the Financial Services Compensation Scheme).

Stocks and shares ISAs can be volatile. You’ll be investing in the stock market, which, as we’ve experienced over the last decade or so, can go up as well as down. That means you could lose money on your original investment. You should typically be prepared to make a long-term investment, as this may mean your stocks and shares ISA returns have a chance to recover from any drops in the market. Equally, you could stand to make significant gains, but there are no certainties.

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How does a stocks and shares ISA work?

With a stocks and shares ISA, you won’t pay income, dividend or capital gains tax on any returns you make on your investments. You can choose to open a managed stocks and shares ISA and pay for a fund manager to manage your investments on your behalf, or you can make your own decisions on where to invest your money. How comfortable you feel with this will typically depend on your level of experience in stocks and shares.

What is the stocks and shares ISA allowance for 2023/24?

According to the common stocks and shares ISA rules, every adult in the UK has a tax-free ISA allowance of £20,000 per year (valid for the 2023/24 tax year which runs until 5th April 2024).

Given this allowance, you might be wondering: can you have more than one stocks and shares ISA? The £20,000 allowance is a combined limit across all the ISAs you hold, and you can only put money into one of each type of ISA per tax year. You can either invest all your allowance in a stocks and shares ISA, or you can split it across different types of ISAs, including cash ISAs, innovative finance ISAs and lifetime ISAs.

Your stocks and shares ISA limit is the maximum you can pay into your account, rather than the total value of your investments. If you put your total ISA allowance into a stocks and shares ISA and the stock market fails, you might not get any returns, and you won’t be able to make any further investments during the same tax year.

Tax on stocks and shares ISAs explained

There are certain tax benefits of investing in stocks and shares ISAs. This is especially true if you’re an additional rate taxpayer and don’t qualify for the personal savings allowance (PSA). If you invest in a stocks and shares ISA, any income earned on the following won’t count towards your overall income tax:

  • Income tax
  • Capital gains tax (CGT)
  • Dividend tax

You should be aware that moving pre-existing investments into your ISA may lead to a CGT charge, as your provider will need to sell and repurchase your investments as part of the process. If your investments have a higher value, and you have already used your allowance, you may face a charge.

While the tax-free status of stocks and shares ISAs is clearly an advantage, it’s worth noting that most people won’t pay tax on the interest they earn from a traditional savings account anyway. Thanks to the PSA, basic rate taxpayers can receive up to £1,000 in tax-free interest, while higher rate taxpayers can earn £500 without paying tax. With interest rates on savings accounts and fixed bonds steadily rising, you might want to consider whether it’s still worth putting your capital at risk in a stocks and shares ISA.

Should I invest in a stocks and shares ISA?

You might consider a stocks and shares ISA if you’re focused on long-term savings goals and have no immediate need to access your money. You could get a much better return from a stocks and shares ISA than a cash ISA or a traditional savings account, but this type of investment doesn’t come without risk. It’s important to understand all the pros and cons and ensure that you’re comfortable with the risk you’re taking, as well as all the potential outcomes.

As the stock market is unpredictable, it’s entirely possible that the value of your investments will go down as well as up, and there might be times when you get back less than you’ve originally invested.

 

How much does a stocks and shares ISA cost?

A stocks and shares ISA will typically cost a similar amount to general investment accounts, although you will be expected to pay two different kinds of fees.

There will be the charge from the financial advisor (or platform if you go down that route) and for those buying funds, there will be the levy fees from the individual fund managers. It’s worth comparing the fees across the platforms and looking into the details to work out the best deal for you. Remember, you will have to pay these fees regardless of how your investments perform.

How do I open a stocks and shares ISA?

Once you have done diligent research, weighed up the risk and potential return, and decided on your provider, the next step is understanding how to invest in a stocks and shares ISA. There are various routes to opening a stocks and shares ISA, including with a bank or building society, through a financial advisor or from an online platform.

You can open a stocks and shares ISA at any time during the tax year. The application process is straightforward and typically done online. You will probably need to provide ID, proof of address, and other such details so you can be verified.

While it’s simple to get set up, that doesn’t always mean you need to invest immediately. You can choose to watch the market until it hits a comfortable level for you, at which point you might invest a lump sum or make regular payments into your account.

The best stocks and shares ISA for beginners

If you’re new to investing or don’t know how to choose the funds to invest in, you may want to consider opting for an investment fund. With this option, a fund manager selects investments on your behalf, which probably makes them one of the best stocks and shares ISAs for beginners. Your money will be pooled along with other investors’ money, and the fund manager chooses where that money goes.

It’s important to note that you’ll probably be charged a fee for an investment fund, which could include paying for both a fund manager and the investment platform. Different investment platforms charge different fees, which you’ll still have to pay whether your investment makes any money or not. It’s worth taking the time to understand the small print, including fees and charges, before committing to an account.

If, however, you have experience in investing and feel confident about controlling your stocks and shares ISA yourself, you can simply compare shares and funds, and choose the ones that are right for you. This is called a self-select stocks and shares ISA.

What is the average return on a stocks and shares ISA?

Stocks and shares ISAs can provide investors with strong returns, but it’s impossible to say exactly what those returns might be because of the unpredictability of the stock market. According to some experts, the average return on stocks and shares ISAs over the past 10 years was 9.64%.

However, while it can be useful to look at stocks and shares ISA performance over the last 10 years, the returns aren’t guaranteed, and no one knows how much your investment will go up or down. For example, during the height of the Covid-19 pandemic in 2019/20, returns on stocks and shares ISAs plummeted, with investors losing an average of 13.3%.

It may therefore be best to look at stocks and shares ISAs as long-term investments in order to increase your chance of profitable returns.

Why is my stocks and shares ISA losing money?

There are various reasons why your stocks and shares ISA may be losing money, including declining investor confidence in a particular industry or poor performance of individual companies, reducing demand for shares. There are often global economic factors at play too. The Covid-19 pandemic, high inflation and Russia’s invasion of Ukraine, for instance, have all taken their toll on the stock market. It can therefore help to review your portfolio regularly.

While the thought of your stocks and shares ISA losing money can be worrying, and you might be tempted to make a snap decision in response to market conditions, it’s important to remember that there will always be fluctuations with this type of account. Stocks and shares ISAs, like many other types of investing, should be seen as a long-term strategy.

If you find the idea of your investment losing money too stressful, a stocks and shares ISA might not be the most suitable option for you. Instead, you might want to consider alternative savings vehicles such as fixed rate bonds (more on this later).

FSCS protection for stocks and shares ISA explained

When you invest in a stocks and shares ISA in the UK, the Financial Services Compensation Scheme (FSCS) protects your investments up to £85,000 per person, per firm you invest with. This means that even if your stocks and shares ISA collapses, you will have £85,000 of your deposits protected. However, it’s important to note that this stocks and shares ISA protection only covers the holding company and doesn’t apply to losses from your actual investments.

Like any financial investment, a stocks and shares ISA is not completely risk-free; it can earn you money, and it can lose you money as the market shifts. If this is something you aren’t comfortable with, it could be worth exploring different types of ISAs or traditional savings accounts instead.

How do I convert my cash ISA to a stocks and shares ISA?

You can convert your cash ISA to a stocks and shares ISA, but it’s important to understand the pros and cons of doing so before you go ahead.

Cash ISAs enjoy a very simple setup, but with low rates and rising inflation, it could also mean that money sitting in your account isn’t reaching its full potential. On the other hand, you’re at risk of losing money with a stocks and shares ISA.

That said, it doesn’t have to be an all or nothing choice. You can switch some of your cash ISA over to a stocks and shares ISA if you want to keep one foot on solid ground. If you do want to make the full switch, you should start by finding a provider who can offer this move and who has a fee set-up that makes sense to you.

How do I withdraw money from a stocks and shares ISA?

If you’re transferring from a stocks and shares ISA to a cash ISA or vice versa, or you simply want to access your cash, there are a few points to consider. Once you have your provider lined up, make sure that you fill out the ISA transfer form before withdrawing any money. If you simply withdraw without starting the process on paper, your cash will lose its tax-free status. Making the switch shouldn’t take more than 30 days.

The alternatives to stocks and shares ISAs

If you don’t have an appetite for risk, it’s worth considering alternatives to stocks and shares ISAs. Fixed rate bonds, for example, provide a guaranteed return on your deposit over a set time, and typically offer competitive fixed interest rates. This means you’ll know exactly how much interest you’ll earn and how long your money will be locked away for.

Six month fixed rate bonds might be right for you if you’re looking for a short-term savings option.

Five year fixed rate bonds could be a good option if you want to watch your lump sum grow over the medium term.

Open fixed rate bonds at Raisin UK

While we don’t offer stocks and shares ISAs at Raisin UK, you can quickly and easily open fixed rate bonds by registering for a Raisin UK Account.

Opening an account with Raisin UK is free, allows you to manage multiple accounts in one place, and offers competitive interest rates from a range of UK banks and building societies.

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